Why Did First Republic Bank Collapse? Another bank collapse?

When First Republic Bank collapsed?earlier this week, some bankers like the head of JPMorgan Chase & Co. said they thought the worst of the banking crisis was?coming to a close. First Republic Bank was the second-largest bank failure in US history. More failures could be on the way.

But the markets are showing?investors are still wary.?JPMorgan Chase bought most of the assets of First Republic Bank in a deal announced early Monday, just after the federal government seized control of the troubled regional bank.

First Republic is the second-largest bank failure in US history, following Washington Mutual which collapsed in 2008 and was also acquired by JPMorgan. It comes after the failure of Silicon Valley Bank (SVB) and Signature Bank in March, which were the?third and fourth largest US banks to fail , respectively.

Like Signature Bank and Silicon Valley Bank before it, First Republic saw a mass exodus of depositors to larger institutions, who feared that the bank would not have the capital to cover huge unrealized losses on its books due to rising interest rates. If it’s a signal of a larger banking crisis, it seems to be one that’s unfolding slowly, but it’s certainly possible that more banks could fail.

San Francisco-based PacWest Bancorp’s shares?plunged more than 39% Wednesday night?and were halted for volatility multiple times Thursday after investors learned the regional bank?was considering a sale. While the bank says it has not experienced a high number of customer withdrawals, the news still stoked fears of a potential surge in withdrawals among regional banks.

Regional banks whose shares are falling include Zions Bancorp and Comerica, whose stock dropped more than 12% on Thursday, and KeyCorp, whose stock dropped more than 6%.

What happened to First Republic Bank?

First Republic has been teetering on the edge of collapse for months. Even before the March $30 billion cash injection, JPMorgan had extended the bank a?$70 billion line of credit ?— together amounting to two major bailouts.

There were hopes that First Republic’s stock would rally, but last week, the bank released a report showing that its total deposits dropped?41 percent ?in the first quarter to $104.5 billion, falling far short of analyst projections of $136.7 billion. That sent its stock price tumbling, closing at $3.51 on Friday and down about?97 percent ?this year.

It’s one of several mid-sized banks, also including SVB and?Signature Bank , whose assets have lost billions in value due to rising interest rates. That’s left depositors skittish and worried that their money isn’t safe, leading them to withdraw their funds and take them to larger institutions better equipped to weather the storm. (Disclosure: Vox Media, which owns Vox, banked with SVB before its closure.)

Meanwhile, TD Bank Group and First Horizon Corp.?called off their planned merger ?on Thursday, citing uncertainties around regulatory approvals.

So what’s next for the banking industry, and how does it affect consumers?

What are the reasons the 3 big banks failed, and PacWest is looking shaky?

As the Federal Reserve tightened monetary policy and raised interest rates to fight inflation, the value of long-term assets ? such as mortgage-backed securities and U.S. treasury bonds ?held by banks plummeted.

Most bonds pay a fixed interest rate that becomes attractive when interest rates fall, driving up demand and the price of the bond. On the other hand, if interest rates rise, investors will no longer prefer the lower fixed interest rate paid by a bond, thus driving down its price.

Many banks increased their holdings of bonds during the pandemic, when deposits were plentiful but?loan demand and yields were weak .

For some banks, the unrealized losses brought on by the Fed's sudden interest-rate hikes will stay on paper. But others may face actual losses if they have to sell securities for liquidity or other reasons. That's because those older bonds with low-interest rates could be sold only at much lower prices than new bonds that carry higher rates,?according to the Federal Reserve Bank of St. Louis.

That, in a nutshell, is what happened to Silicon Valley Bank,?when turmoil in the tech world forced many of the banks’ customers – largely tech startups?– to withdraw their deposits.

In addition,?Silicon Valley?Bank had a disproportional share of uninsured deposits (any?amounts over that $250,000 limit are considered?uninsured?deposits by the Federal Deposit Insurance Corporation, or FDIC), with only 1%?of banks having?higher uninsured leverage, according to a study.

Like First Republic Bank,?Pacific Western Bank?lost?20% of customer deposits compared to the end of last year?as customers moved their deposits to the perceived safety of larger banks.?

“Silicon Valley Bank failed because of a textbook case of mismanagement by the bank. Its senior leadership failed to manage basic interest rate and liquidity risk. Its board of directors failed to oversee senior leadership and hold them accountable. And Federal Reserve supervisors failed to take forceful enough action,” according to a scathing Federal Reserve report released last week.

News Trends Editorial - Reports

Is your money in a bank safe?

Research indicates Americans are increasingly worried about the safety of their money in the bank.?A recent Gallup poll ?found 48% of U.S. adults say they are concerned about the safety of money they have deposited in banks and other financial institutions. The poll was conducted on?a random sample of more than 1,000 U.S. adults in April following the collapse of Silicon Valley Bank and Signature Bank but before First Republic Bank failed.

Experts have said?there’s no reason customers should worry?about money kept in banks that are covered by the FDIC, especially since few depositors surpass the $250,000 limit on the insurance.

Depositors concerned about the limit can open multiple accounts at different banks to keep accounts under the $250,000 cap, or open a joint checking account that would insure up to a total of $500,000 in the account ($250,000 per person).

Federal regulators have signaled that even for depositors who surpass the $250,000 limit, the government is likely to intervene and make sure deposits are covered as they did after Silicon Valley Bank, Signature Bank, and First Republic Bank collapsed.